2023 has already had a few big financial stories here in the US but one of the most interesting is a bit esoteric relative.

​This is the recently proposed federal ban on Non Compete Clauses.​

For the uninitiated, non compete clauses are contractual terms used by employers to restrict the ability of employees to work with a competitor or start a competing business for a certain period of time after leaving employment.

​Apparently as many as 30 million Americans - or one in five workers - are subject to these clauses and they are particularly popular in certain industries like technology and finance.

The obvious argument against them is that while they are intended to keep employees from absconding with proprietary information, in reality they are often used indirectly for other, more nefarious purposes:

• Foremost among them would be to keep employees' salaries suppressed because it is difficult if not impossible to take your talents elsewhere.

• Another might be to ensure that potential rival firms cannot hire valuable and experienced employees at any price.

On the face of it these clauses seem pretty problematic. It isn't much of a free market if all the freedom is on the side of the economy.

Claiming that we have a free market also isn't worth much if we are permitting policies that directly harm innovation and competition. And it is patently absurd that a company can decide whether you can or cannot work in an industry for some arbitrary period of time without paying for the privilege.

In short, the non compete clause is one of the many parts of the American economy that are not, when you come to think about it, very American.

We agree with all of this. We should also state that all of us here at Pebble HQ have been subject to Non Compete Clauses in the past and have not enjoyed the experience. Our humble firm's birth was arguably delayed while its founding team had to contort themselves around a very restrictive non-compete agreement. We also do not use them.

So, we not only get why such a ban would be popular but also why they can have a lot of hidden costs and harm US economic growth and productivity.

There are two rather large and seemingly undiscussed problems, however:

1. The first is that the evidence for some of the claims against non compete clauses is vanishingly thin.

2. The second is the manner in which this ban is being proposed.

As we stated above, the FTC and others claim that as many as 30 million Americans are subject to non compete clauses in their employment contracts. We will take them at their word there, they are widely used and standard in many industries.

But the supposed benefits of removing these clauses are not that self-evident.

​Here is the FTC's Chair, Lina Khan:​

“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand."

But where we are a little more skeptical is in their arguments for the impact of removing them. In their proposal for enacting such a ban they quote that:

...the proposed rule could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.

and also, of course, the obligatory diversity claim:

.....banning noncompetes nationwide would close racial and gender wage gaps by 3.6- 9.1 percent.

That seems an eye-catching number for the average worker perhaps intentionally so. The idea being that the best way to sell a policy to the public would be to highlight the potentially very considerable payday that would come their way.

But we aren't buying.

For one thing, that number is very large but it actuality it turns out to mean - by the Commission's own analysis - a very meager 2.3% increase for hourly workers.​

That lines up with studies elsewhere that suggest the number is pretty low. In 2015, Hawaii banned non competes for certain classes of workers and saw a similar increase for new employees (~4%). Oregon's ban had numbers in a similar range (2-3%).​

Now, three percent is still three percent more money which certainly isn't negative but unstitching the numbers it seems that such a ban would be far better for better off employees. Using the same studies as the FTC, CEOs, for instance, apparently, could see a 9.4% increase. In a day and age where the average Fortune 500 CEO makes $15.9 million (which is 324 times higher than their average worker) this seems unnecessary.

It certainly seems to undercut the case that this is all about the working man or at least it does for us.

In many ways however, the debate about how consequential such a policy would be is secondary. Where we are even more opposed to this policy is the massive regulatory overreach the FTC is proposing.

By that we mean that we are pretty sure that the FTC has no right to enact such a policy but even if it did, there are real question marks.

On the first part, Chair Khan cites the Commission's founding act as giving the agency wide authority over the US economy. In the formal proposal for the ban Chair Khan references Section 5 of the FTC Act, which declares rather broadly that “unfair methods of competition in or affecting commerce” are “hereby declared unlawful.”

Well, sure.

That may be true but a regulatory agency - any regulatory agency - suddenly getting to decide the definition of what is "unfair" is quite a legal leap and also an unprecedented one. Just because something might fit under the definition of the terms used in your founding Act doesn't mean you have the legal authority to regulate it.

In fact, getting to re-define your legal authority is exactly the opposite of what any regulatory agency should be able to do.

It might also be worth pointing out that, previous to this proposed ban, the FTC has never, in its entire history, publicly argued that a noncompete was "unfair." They have never won a case in an area of law that they are suddenly claiming wide authority over.

Hmmmm.....

In any event, as with any profound and sweeping change to the economy it would be best if the shift was both debated and then legislated by Congress. That is why we have such a chamber and why we have such hotly contested elections.

But more broadly than that, we don't think that any regulatory agency can or should suddenly decide to give itself a host more powers. That invites not just legal challenges but also economic or regulatory chaos.

Why?

Well, as we keep finding out to our cost, when one party decides to expand the scope of what is possible it also encourages the other party to do so. It also damages trust and faith in the government.

The latter is already hanging by a very thin thread.

But we cannot have our regulatory state dramatically re-defining the rules of the economy based on a political whim depending on the last election. Non competes eliminated under Democrat administrations and operating under Republican only creates more, not less dysfunction.

If we are going to get rid of non competes at the Federal level rather than the piecemeal state-by-state process of experimentation that is currently ongoing then we need to both debate it and also study it, ideally by a Congressional Committee that can consider the consequences of such a broad based policy.

For instance, we also noticed that in the FTC's proposal there was also no discussion (or study cited) of what such a ban would do to inflation.....

Banning non competes nationwide might not be inflationary, it might be inflationary but nonetheless worth it but at a time of eroding standard of living, it might be best to at least have an idea?

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